Illinois' Economic Recovery in Peril after Legislature Passes Corporate Tax Increase

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Researched by Industrial Info Resources (Sugar Land, Texas)--Illinois, like the entire Great Lakes region, has been struggling to recover from the lasting and devastating effects of the national recession. This particular region of the country has arguably felt the lash of the recession more than any other area. Hundreds of thousands of jobs were lost and thousands of plants were closed in the Great Lakes region thanks to its reliance on the automotive sector and the heavy manufacturing sector, which both faced significant downturns throughout the recession. With its reliance on these sectors, Illinois had been pulling out all the stops to attract new business to its cities and to a certain extent had been quite successful, with the state unemployment rate dropping from 12% a year ago to 9.6% in November 2010. However, much of the progress made in the state may now be in jeopardy as the state legislature, faced with a $13 billion deficit, passed a bill which will increase both corporate and personal tax rates.

The corporate tax rate will be increased from 4.8% to 7% within the state, with the personal income tax rate being boosted by 66%. Both tax increases are going to be retroactive, with an official start date of January 1, 2011. Proponents of the bill point out those surrounding states already have higher tax rates, and thus this increase should not affect business within the state of Illinois. However, the reality of the perception of the state may have a long-lasting effect on the overall business climate.

While both Wisconsin and Iowa currently do have higher tax rates, both Indiana and Michigan have lower rates, which could pull businesses away from Illinois to the greener pastures just to the east. In addition, Wisconsin is in the process of reducing their tax rates over the next two years, which could be an added bonus for companies who are looking to open facilities in the Great Lakes region. Wisconsin already has dusted off old publicity campaigns aimed at pulling both business and residents to the state and is beginning a campaign to attract business away from Illinois, citing the tax increases.

From a spending standpoint, companies have not been investing heavily within the borders of Illinois during the recession. 2011 was poised to be the first year on the road to economic recovery, but that may change as companies reevaluate their options. Between 2007 and 2010, industrial spending averaged $5.8 billion per year. The high during that time period was 2007, when $7.7 billion in capital and maintenance projects began construction, while the low was in 2009, when only $3.2 billion in projects occurred.

Currently, Industrial Info is tracking 195 capital and maintenance projects worth an estimated $14.9 billion that are scheduled to begin construction during 2011 in the state of Illinois. There is an additional $17.7 billion worth of projects scheduled to begin construction in 2012 in the state. However, as companies look at the consequences of this tax increase, not only to themselves but also to their potential employers who will request higher salaries to make up for the personal tax increase, these spending numbers may be reduced.

The Power Industry is leading the spending charge within the state, with $7.8 billion in projects scheduled to begin construction during 2011 and $14.8 billion in 2012. If the companies and individuals who require that additional power begin to move out of the state, however, spending likely will decrease. Power companies also may take a wait-and-see attitude to current projects and postpone their construction as they reexamine the effects of these tax increases on power needs within the state. While some other industries are looking at significant investment in Illinois in the coming year, such as the Alternative Fuels Industry, which has $4.2 billion in projects scheduled to begin construction in 2011, and the Metals and Minerals Industry, which will contribute $993 million, the same may apply to these projects.

There will not be any immediate effects, obviously, as it takes time for companies to evaluate their capital plans, but the decision to raise these taxes was certainly ill-timed, to say the least. Illinois, while facing a massive deficit and significant spending issues--something that was not addressed by the legislature--was just beginning to see the benefits of the last two years' worth of lobbying businesses to come into the state. Some of these businesses certainly will feel misled by the tax increases which will further hurt the state's credibility within industrial circles. By this summer, the effects of this tax increase should begin to be felt across the state, but within a state struggling to recover from a bad overall economic situation, raising corporate taxes and potentially driving off business does not seem like the way to solve the problem.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.